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Your Finance: Higher-yield investments

Balancing investments in a time of very low

Balancing investments in a time of very low interest rates can involve a departure from principal-guaranteed vehicles but may provide a higher income stream if the economy continues its recovery. Photo Credit:

In what may be a last-ditch effort to resuscitate employment and economic growth, the Fed has embarked on a third round of quantitative easing -- QE3 -- or buying Treasury and mortgage bonds to lower long-term interest rates and provide an incentive for companies to hire and banks to lend.

The Fed said earlier this month that it will be buying $40 billion worth of debt securities every month until the labor market rebounds significantly.

Whether the Fed's program will work remains to be seen -- the jobless rate has been stuck around 8 percent despite two previous easings -- but it needn't be another body blow for income-oriented investors who will suffer because of painfully low savings yields, which may even drop slightly.

If you can afford to take on more risk, you can find higher-yielding investments to enhance your portfolio. It will involve a departure from principal-guaranteed vehicles but may provide a higher income stream if the economy continues its recovery.

An improving economy -- Fed-induced or not -- makes some of the more volatile yield-enhanced vehicles somewhat less risky. Junk bonds from companies with less-than-stellar balance sheets will have a lower tendency to default.

A yield-enhancement strategy can supplement your "safe" money with higher-returning funds. Of course, as with any new approach that delivers more return, you have to keep an eye on risk. And how much of a yield-enhancement strategy you adopt depends on your cash-flow needs. If you need an absolutely safe reserve for daily living, taxes, emergency, medical or college expenses, then take a big sigh and stick to federally insured products. Here are three main areas to consider:

Real estate investment trusts (REITs): These publicly traded companies own mostly commercial real estate and mortgages. You can get ultra-specialized or own a broad portfolio of properties. In the first half of the year, REITs outperformed the general stock market on total return and yield, according to NAREIT, the trade organization representing REITs.

High-yield bonds: As with REITs, high-yield bonds also can be worthwhile additions in an improving economic climate. These securities are issued by companies that are not in tiptop financial shape, so they offer higher yields to attract investors.

They are best purchased in exchange-traded fund (ETF) portfolios such as the SPDR Barclays Capital High Yield Bond ETF, yielding 7 percent, or the PowerShares Fundamental High Yield Corporate Bond ETF, yielding 5 percent.

Emerging-market bonds: If you look outside the United States and the eurozone, you can often find better-yielding government bonds, which look even better as yields fall on U.S. Treasury bonds.

Developing countries often have high credit ratings and attractive yields.

Key steps

REITs: Keep in mind that they do best in an environment of rising rents and property values.

High-yield bonds: These portfolios hold the lowest-rated corporate bonds, so they are highly sensitive to economic conditions.

Emerging-market bonds: Always look at bond ratings within a portfolio. The lower the letter grade, the higher the risk.

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